NEW YORK (CNN/Money) -
Microsoft Corp. Thursday reported lower net earnings for the latest quarter but sales that topped Wall Street forecasts, the latest sign that the tech sector recovery is in full gear.

But the stock fell in after-hours trading as investors appeared to worry about another steep decline in a key indicator of future sales growth.

Sales for the company's second fiscal quarter came in at $10.15 billion, a 19 percent rise from a year earlier, and well ahead of the $9.7 billion in revenues that Wall Street analysts were expecting.

"Consumer and corporate demand for PCs continued to exceed our expectations," Chief Financial Officer John Connors said in a statement. "The overall corporate IT market also began to show signs of a recovery, with increased demand for both desktop and server products," he added, referring to the information technology business.

In addition to solid sales increases of Microsoft's XP and Windows Server operating systems and Office software, the company also saw strong revenue gains in its MSN Internet unit. The weak dollar also helped Microsoft. The company said sales would have been $312 million lower if exchange rates were the same as a year ago.

But unearned revenue, which measures the sales from software license renewals that Microsoft expects to book in coming quarters, fell about $400 million from the fiscal first quarter, to $7.85 billion.

That was a bigger drop than many analysts were expecting, but during a conference call with analysts, Connors said that Microsoft felt "good" about the unearned revenue figure and that the total at the end of the fiscal year would be about the same as at the end of the second quarter.

The software maker said net income fell to $1.55 billion, or 14 cents a share, in the quarter ended Dec. 31, from $1.87 billion, or 17 cents a share, a year earlier. The results included a 6 cent-a-share charge for compensation costs associated with its new restricted stock program and a 14-cent-a-share charge for a stock option transfer program, which allowed employees to sell underwater stock options.

Robert Mattson, an analyst with Gartmore Global Investments, an institutional money manager that owns the stock, said that Microsoft's numbers were good, but probably won't be enough to propel the shares out of the "flattish" range they have been trading in for some time.

Shares of Microsoft (MSFT: Research, Estimates) fell about 1 percent in after-hours trading, according to Instinet, following a 1 percent dip in regular trading on Nasdaq Thursday.

The stock has been a laggard during the recent tech rally because of concerns about slowing growth, the emergence of the Linux operating system as a threat to Microsoft's Windows, and several high profile computer viruses that have targeted Microsoft software.

Based on the size of the unearned revenue drop, these concerns will probably linger.

Philippe Investment's Adelman said that the continued decline in unearned revenue is a possible sign that many customers are waiting for the release of Microsoft's next operating system, known as Longhorn, before deciding to buy software upgrades. But Longhorn isn't due out until 2006.

"People might be delaying some purchasing decisions and in the short-term, that's considered a negative," Adelman said.

Gartmore's Mattson added that it will remain tough for Microsoft to convince Wall Street that it is capable of consistently generating double-digit percentage growth.

But one analyst said investors focusing on the unearned revenue figure are missing out on one key fact: Microsoft should be one of the biggest beneficiaries of a pickup in technology spending as the overall economy improves.

YOUR E-MAIL ALERTS

Follow the news that matters to you. Create your own alert to be notified on topics you're interested in.

"Everything we've seen shows there will be sharp acceleration in basic purchases of PCs and low-end servers" in the current quarter, said Michael Shulman, director of research for ChangeWave Research. "If people have concerns, they're wrong."

Microsoft did issue slightly better than expected guidance for its fiscal third quarter, which ends in March, and for the full fiscal year. During the conference call, Connors said PC growth should remain strong during the quarter but that consumer spending growth will probably continue to outpace corporate spending increases.

Microsoft is forecasting sales of $8.6 billion to $8.7 billion and earnings of 28 cents or 29 cents a share, excluding a 5-cent-a-share charge for compensation expenses. Analysts had been expecting Microsoft to report sales of $8.5 billion and earnings of 27 cents a share.

For the year, Microsoft expects sales to be between $35.6 billion and $35.9 billion, compared to the consensus estimate of $35.3 billion. As for earnings, the company is predicting profits of $1.17 or $1.18 a share, excluding charges, while Wall Street was expecting earnings of $1.15 a share.

Microsoft continues to sit on a veritable mountain of cash as well. Cash and short-term investments totaled $52.8 billion as of the end of December, up from $51.6 billion as of the end of the fiscal first quarter.